After StanChart's revamp, questions linger over likely benefits

Reuters - UK Focus

By Steve Slater and Carmel Crimmins

LONDON, Jan 10 (Reuters) - Standard Chartered Plc (HKSE: 2888.HK - news) 's top 500 bankers gather in Singapore next week for their annualstrategy huddle with an unusual degree of uncertainty swirlingaround the former stock market darling.

The departure of two top lieutenants and a surprisereorganisation have deepened concern about the Asia-focusedlender's ability to restore its double-digit growth rates andavoid tapping investors for more capital.

Chief Executive Peter Sands said this week a plan to mergethe bank's consumer and wholesale (or business lending) unitswas about removing duplication and delivering better returns forshareholders.

But he put no figure on how much StanChart would save fromthe restructuring or quantify the potential revenue gain.

The lack of detail, coupled with the surprise announcementthat Richard Meddings, the group's well-respected financedirector and hitherto Sands' heir apparent, was leaving, alongwith Steve Bertamini, head of consumer banking, helped send itsshares down to their lowest in a year and a half.

"I think the announcement raised more questions than itanswered," said James Chappell, analyst at Berenberg, which hasa "sell" rating on the bank. "I think investors are likely to beconcerned about what additional issues might be going on in thebackground."

After 10 years of record annual profits on the back ofroaring demand in Asia, the good times have come to a halt atStanChart and Sands is under pressure to prove he can steer thebank through a new era of slowing growth, tougher regulation anda painful restructuring process in Korea.

The elevation of Mike Rees, head of the wholesale division,to a new position of deputy CEO makes him the internal frontrunner to eventually replace Sands, chief executive since 2006.

INCOME GROWTH

Last year, the bank struggled to give a consistent messageon its performance and prospects. In December, it warned it wasprepared for the first fall in profits in more than a decade.

After delivering compound annual income growth of 15 percentbetween 2002 and 2012, StanChart now expects revenue growth inthe short term will be less than 10 percent. Its return onequity target of at least 14 percent will also be missed.

Having coasted through the financial crisis and seen itsshares outperform European banks as a whole by 500percent between 2002 and 2012, StanChart shares have since thendropped 18 percent while the sector advanced 25 percent.

But its operating environment plays a big part in thesecontrasting fortunes. "We're not talking about a business modelthat's bust, we're talking about one that, relative to others,has not shown massive improvement," said one top 20 investor.

"If you look at Lloyds or Royal Bank of Scotland (LSE: RBS.L - news) , yes, theenvironment in the UK is improving quite a lot, whereas inStandard Chartered's case, Asia and the Middle East is weakeninga little bit, so it's a relative thing rather than an absolutething."

One insider said this week StanChart's reorganisation would"re-energise and re-invigorate" the bank.

The question facing investors is whether the reshuffle goesfar enough. Most global banks have restructured in the past twoyears to cut costs and narrow their focus, and moves by thelikes of HSBC, Barclays (LSE: BARC.L - news) , UBS (Xetra: UB0BL6 - news) andCitigroup (NYSE: C - news) have been deep and wide.

NOT AS SHARP

"A lot of things have arrived on their plate at the sametime, so I guess under the circumstances you probably need toreduce your costs now. Have they been slow out of the block?That is a question that will be asked," said Jim Stride, head ofUK equities at AXA Investment Managers.

"They've probably not been as sharp on curtailing the costsas they ought to have been."

StanChart shares trade on a multiple of 1.13 times estimatedbook value, a premium to 0.99 for the European sector.HSBC is on 1.18 times and banks that have undergone bigrestructurings are on a higher multiples - 1.52 times for UBSand 1.43 for Lloyds.

StanChart's supporters say it does not need to go as far inrestructuring as it was in better shape than rivals.

Meanwhile questions linger about whether it needs to sellshares to boost its capital defences.

Sands reiterated this week the bank did not need to raiseadditional equity and was comfortable with its core Tier Onecapital ratio, which it put at 11.4 percent at the half-year.

But the regulatory landscape is uncertain, particularly inthe UK where core capital requirements could be hiked to 12percent as the central bank seeks to protect taxpayers againstfuture bank failures.

The danger for StanChart, and Sands, is that if earningsdisappoint or loan losses increase, it may be forced to raisecapital to meet regulatory targets.

"I think you need to see emerging markets improve before youmaybe see Standard Chartered get better, and that's completelyout of their hands," said the top 20 investor.

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